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Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.

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Disclaimer
The material in this webinar is for informational purposes only. It should not be considered
legal, financial or other professional advice. You should consult with an attorney or other
appropriate professional to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate,
Financial Poise™ makes no guaranty in this regard.
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Meet the Faculty
MODERATOR:
Robert Londin - Jaspan Schlesinger LLP
PANELISTS:
Leslee Cohen - Hershman Cohen LLC
J. Richard Claywell - The Office of J. Richard Claywell
David Spitulnik - Spitulnik Advisors
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About This Webinar
What Every Founder/Entrepreneur Must Know
Congratulations. You are a founder of a company and you have just been given an hour to
ask several experts anything you want about the subject. Some questions will certainly focus
on IP, since intellectual property is so important to so many businesses. Some questions will
touch on outsourcing- perhaps of manufacturing, perhaps of certain other
functions. Formation, capital raising, and HR are also fair game. And since the panel
includes two attorneys, you can be sure that the conversation will cover both the business
and legal aspects of the various topics discussed. The panel will also discuss planning for
incremental growth; and, while pandemic continues, the availability of PPP loans and
governmental assistance.
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About This Series
Most startups are not destined to become billion dollar unicorns. Most, in fact, will fail and
most of those that survive may never be more than small businesses. Whether and to what
extent a startup will be successful depends on many factors. One set of factors is the
foundational pillars on which the company is built, and includes things such as the company’s
capital structure, financial controls, human capital, management/founder talent, market niche
(and barrier to entry), financing growth, managing burn rate, and marketing functions. This
series explores each of these topics, giving startups, entrepreneurs, and their advisors useful
tools and insight into how they can build a foundation for success.
As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors, business
owners, entrepreneurs, and executives without much background in these areas, yet is also valuable to attorneys,
accountants, and other seasoned professionals. And, as with every Financial Poise Webinar, each episode brings you
into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is
designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area
whether they attend one, some, or all episodes.
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Episodes in this Series
#1: The Very Basics: Forming the Business
Premiere date: 1/27/21
#2: Raising Capital: Negotiating with Potential Investors
Premiere date: 2/24/21
#3: What Every Founder/Entrepreneur Must Know
Premiere date: 3/31/21
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Episode #3
What Every Founder/Entrepreneur Must Know
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Forming an Entity
• What’s the first thing a new business owner should do?
 Form an entity
• Why form an entity?
 Limited liability (capped vs. unlimited)
 With: The business owner is only at risk for the amount of their investment and
none of the other obligations of the business
 Without: The business owner is responsible for all of the business’ liabilities
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Forming an Entity
More Reasons to Form an Entity:
• Interaction with third parties
 Credibility with financing or other sources
 May be demanded by third parties as a means of reducing potential liabilities
• Flexibility and structure for management and control
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Types of Legal Entities
• The two most common forms of legal entities are:
 Corporations
 C or S-Corps
 Limited Liability Companies (or LLCs)
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Corporations
• Corporations
 There are two variations on the corporation (based on the way they are treated for
tax purposes)
 C-Corp
 Unless you plan to raise venture capital or go public, you’ll likely want to
stay away from the C-Corp…it’s earnings are taxed twice!
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Corporations
 S-Corp
 Not subject to double taxation (pass-through entity)
 Restrictions include (1) only individuals can be shareholders, (2) no more
than 100 shareholders, (3) only U.S. persons can be shareholders, and (4)
funds can only be divided between the shareholders “pro rata” (i.e., can’t
have more than one class of stock)
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Other Types of Corporations
• Professional Corporations
 Available, and typically mandatory, if forming a corporation, for certain professions
(lawyers, doctors, accountants, etc.)
 May not be able to limit individual liability, at least for malpractice actions, even if
using
• Statutory close corporations
 Limitation on number of shareholders (35)
 Flexible management structure such that a shareholder with much less than majority
ownership may be able to control management
 Fallen into disfavor in the LLC era?
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Other Types of Corporations
• Non-profit corporations
 No profits distributed to shareholders
 Limitations on purpose, use of funds, etc.
• Co-operative corporations (consumers, agricultural, etc.)
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Limited Liability Companies (LLCs)
• LLCs offer, as their name suggests, limited liability like a corporation, taxation like a S
corporation or a partnership, and do not have the restrictions on ownership of a S
corporation
• LLCs offer a flexible management structure such that they can either be operated by one,
some or all of their members (the LLC equivalent of shareholders) or a manager or
managers, who may or may not be members
• Can have more than one class of membership interest (flexibility on structuring
distributions and voting rights)
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Limited Liability Companies (LLCs)
• LLCs are formed by the filing of a certificate (or articles) of organization.
• Their primary governing documents, which are not mandatory but are highly advisable,
are known as operating agreements
 Operating Agreements are similar to bylaws but often include additional provisions of
governance and share transfer which may be included in a shareholder agreement
of a corporation.
 Operating agreements provide how distributions are made and how profit/losses are
allocated among members
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Limited Liability Companies (LLCs)
• LLCs have become extremely popular for the advantages and flexibility they offer.
• However, because of their relative newness and largely contractual nature:
 LLCs offer less certainty, to both their members and outside entities dealing with
them, than do corporations.
 While LLCs are permitted to grant stock options, have more than one class of stock
and do not generally have limitations on who can become members, there is enough
haziness on these issues such that professional investors will generally prefer a C
corporation; professional investors also prefer C corporations for tax planning
reasons
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Summary of Primary Entity Choices
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Risk Management
• Corporate counsel
• Business licenses & registrations
• Internal controls / policies & procedures
• Insurance
 D&O
 Key Man
 General Liability
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Building a Team
• Board of Directors vs. Board of Advisors
• Resources needed (by function)
 Business Development
 Operations
 Finance & Accounting (including Tax)
 Legal
 Human Resources
• Employee vs. independent contractor (IC)
• Focus on revenue generation (infrastructure lags revenue)
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General HR Tips for Start-Ups
• Act as a leader
• Policies and training are just the start
• Create and communicate values
• Institutional values
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Laws and Regulations (Federal)
• Department of Labor
 Wages & Hours
 Workplace Safety
 Workers’ Compensation
 Employee Benefits, etc.
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Talent Acquisition – Recruiting
• Develop a recruiting plan
• Identify vacancy and evaluate needs
• Develop position description
• Advertise position
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Employment of Negotiations – Type of Employment
• Status: Full Time v. Part Time
• Classification: Exempt v. Non-Exempt
• Independent Contractor
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Employment of Negotiations – Type of Employment
a. Full Time Employees vs. Independent Contractors
b.
Source: http://employment.findlaw.com/hiring-process/being-an-independent-contractor-vs-employee.html
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Employment-Related Documents
• Offer letter (outlining basic terms of employment and conditions to commencement of
services)
• Noncompete
• Non-solicitation
• Confidentiality
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Employment-Related Documents
• Noncompete Provisions
 Terms restricting an employee’s ability to work for competitors for a specified
amount of time (sometimes within a specified geographic area) after an
employee leaves a company.
 Often used to protect trade secrets or goodwill
 Enforceability
 Often restricted or unenforceable under state law.
 Each state has its own unique laws and rules about whether, when and to
what extent a non-compete agreement is enforceable.
 Reasonableness of non-compete restrictions are often the key to
enforceability! Duration and scope must be reasonable.
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Employment-Related Documents
• Non-Solicitation Provisions
 Terms restricting employee’s ability to solicit company’s clients or customers for
employee’s own benefit or benefit of another employer after leaving company.
 May also include agreement not to solicit other employees to leave when exiting
employee leaves.
 Often used in service or sales businesses
 Enforceability
 Again – know the law in your state!
 Where enforceable, must be drafted so that it is not too difficult for employee
to earn a living or unfairly limit a competitor’s ability to hire workers or attract
new customers
 Valid business reason should/must exist for enforcing non-solicitation
provisions
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Employment of Negotiations – Employment Agreement
• Confidentiality Provisions
 Agreement prohibiting employee from disclosing company’s confidential or
proprietary information.
 Often effective during an employee’s time with company, and lasting for a
period of time after employee leaves (1-3 years is common).
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Outsourcing HR
• Benefits
 Frees employer to concentrate on core competencies
 Saves money
 Improves compliance
 Improves recruitment
 Provides access to latest tools and technology
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Funding Your Business
• Sources of Financing
 Bootstrap
 Friends & Family
 Government
 Angel Investors
 Venture Capitalists
 Commercial Banks
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Funding Your Business
• Select documents necessary to raise financing
 Business Plan
 Executive Summary
 Management Team + Board of Directors (Advisors)
 Market Size
 Financial Projections
 Business Formation Documents
 Confidential Information Memorandum (CIM); Risk Factors
 Contracts
 Employment Agreements
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Equity – Selling Ownership Interests
• Individuals or firms provide money in exchange for an ownership percentage (shares,
stock) in a company
• May take numerous forms
• Entails loss of some ownership to founders, but can be beneficial for startup that doesn’t
expect to generate revenue sufficient to repay loans or reinvest in the company
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Angel Investors
• Equity-based investing by wealthy individuals
• May be an industry executive or experienced businessperson able to provide guidance to
company
• May give company credibility to attract other investors.
• Angels may work in organized groups to screen deals & invest with each other, while
many invest on their own.
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What Do Angels Want?
• High growth and scalability
• Thus software and tech, more than manufacturing
• A market for the innovation, a moat against future competitors
• Payoff (exit) in 5 to 10 years
• To build their own brand to gain access to future deals
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What Angels Have Gotten
• 2.5x exit on average
• 4.5 year average holding period for successful exits
• 50% to 70% dilution when investing at seed stage [per Angel Resource Institute]
• If initial valuation is $10 million and 50% - 70% dilution expected, then to reach 2.5x Angel
investment, exit valuation should be $83 million, or 8.3x
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Angel Batting Average
• Lower than baseball batting averages
• Many losers, but high returns from winners
• Likely need for future investments rounds
• Angels diversify their bets, and bet with funds they can afford to lose
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Venture Capital
• Investment firms willing to put forward a large sums of money in exchange for equity in
the company
• Financing typically conditioned on VC pulling money out after company is acquired or
goes public.
• VCs are professional investors seeking significant return on investment
• Typically significant investment for potential exponential return on investment; these are
targeted by VCs because of the significant time commitment required in the deal process
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Dilution
• First Founder(s) own 100%
• Then seed funders and employees are distributed shares; Reserved Equity Plan/Awards
• Then Angels purchase a percentage of total shares
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Dilution
• NOTE: With each of these steps, the ownership share of the predecessor owners is
diluted
• Venture Capital and other later funders are likely to insist on some control (e.g., a Board
seat) an on preferential payouts in the event of a liquidation- these doubly dilute their
predecessors
[See Equity Investment Simulation at http://ownyourventure.com/equitySim.html]
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Offering Process for Equity Securities
• Offers and sales of equity securities must either be registered with the SEC and offered
publicly or exempt from registration and offered privately
• Pre-JOBS Act (2012), an investor must have been an accredited investor in order to
participate in an exempt offering, and issuers of private equity securities were barred
from engaging in general solicitation or advertising
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Accredited Investors in Exempt Offerings – Who?
• “Accredited investors” include natural persons who:
 Possess a net worth (alone or with spouse) >$1 million (excluding value of home,
and not counting home mortgage as a liability, unless it is underwater) or
 Have an annual income >$200,000 (or joint income with spouse >$300,000) in the
two most recent years, and reasonable expectation of similar or higher income in the
current year
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Investing in Private Equity Securities Pre-JOBS Act
[Rule 506(b)]
• Accredited investor has pre-existing, substantive relationship directly with issuer
• AI has pre-existing, substantive relationship with an intermediary, such as a broker-
dealer or investment advisor
• AI purchases resold private equity shares in secondary markets
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JOBS Act of 2012 (In Summary)
• SEC’s prohibition on general solicitation and advertising eliminated in certain private
offerings in which only accredited investors participate (Rule 506(c) and Title II)
• In addition to pre-JOBS Act access via issuers and intermediaries with whom AIs had
pre-existing substantive relationships, AIs can now invest in private equity securities via
on-line investment platforms that advertise and engage in general solicitation
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JOBS Act of 2012 (In Summary)
• Accredited investors and the “crowd” of non-accredited investors will be able to invest in
private equity securities via Title III (aka Reg CF) on-line “crowdfunding portals” (with
annual investing limits keyed to income, net worth)
• Accredited investors and non-accredited investors will be able to invest in private equity
securities via Title IV (aka Reg A+) offering platforms (with annual investing limits keyed
to income, net worth)
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Common Documentation When Dealing With Investors
• Term Sheets
 Set out details of investor funding; come in a variety of forms depending on the
round of funding addressed and investor involved.
• Stock Purchase Agreements
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Common Documentation When Dealing With Investors
• Business Loan Agreements/Financing Agreements
 Set forth terms of financing with lenders, length of loan, interest rates, conditions, etc
• Personal Guaranty
 Executed by startup owners to guarantee repayment of loan from personal assets in
event of default by company
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Common Documentation When Dealing With Investors
• Convertible Notes
 Short-term debt that automatically converts into equity upon future events in a
company’s life, such as a later round of financing when a valuation is established;
current practice is to use SAFE Agreements rather than convertible/bridge notes in
early rounds of financing
• Security Agreements
 Involved with debt financing: lender is granted a secured interest in company’s
assets, on which it can foreclose and sell in the event the company defaults on its
loan obligations
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About the Faculty
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About The Faculty
Robert Londin - rlondin@jaspanllp.com
A partner in his firm’s Corporate and Commercial Transactions Group, Mr. Londin counsels
numerous companies in connection with their mergers and acquisitions (both strategic and
financial), financing needs and the execution of their business plans; financial concerns in capital
markets transactions; emerging-growth companies; seed and venture capital clients in connection
with the formation of their investment vehicles and making of their portfolio company investments;
borrowers and lenders in secured financings; and companies and highly compensated executives
in connection with their compensation and separation arrangements. Rob serves as general
counsel to many clients and their senior executives and advisory boards. This general corporate
representation covers day-to-day legal issues as well as strategic planning and business
development extending to acquisition and financing concerns. He also represents technology and
emerging-growth clients in connection with their strategic alliances, technology licensing, mergers
and acquisitions, corporate finance, venture capital, banking transactions and general corporate
needs.
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About The Faculty
Leslee Cohen - LCohen@hershco.com
Leslee Cohen, Principal at Hershman Cohen, concentrates her transactional practice in securities law, corporate
finance and general corporate law. She counsels a variety of entities, from small entrepreneurs and start-up
companies to large established businesses, across many industries from real estate to technology in connection
with private placements of both equity and debt securities, including venture capital, private equity and “friends
and family” investments. Leslee also structures, negotiates and documents significant business transactions,
including mergers and acquisitions, tender offers, joint ventures and other business combinations and financial
transactions. In addition, she handles general corporate matters including commercial contract drafting and
review, stockholder and limited liability company agreements and structuring, business restructurings,
employment and consulting agreements, and equity incentive plans and agreements, on behalf of a diverse
group of clients. Leslee’s practice encompasses Securities and Exchange Commission (SEC) compliance for
microcap public companies and committees of their boards of directors, providing counseling regarding
disclosure and regulatory obligations under the Securities Exchange Act of 1934 and the requirements of the
Sarbanes-Oxley Act, including corporate governance, ethics and executive compensation issues. Leslee also
represents broker-dealers and investment advisors in connection with securities law issues.
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About The Faculty
Richard Claywell - richard@biz-valuation.com
Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in Business
Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified Valuation Specialist,
Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst in Financial Forensics, Certified
in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has been valuing closely held companies
since 1985. Richard’s practice is restricted to business valuation, economic damages, profit enhancement and exit
planning. Richard received his Bachelor of Science in Accounting in 1979 from the University of Houston – Clear
Lake. He then received certification as a Public Accountant in 1983. Over the years, Richard has earned additional
accreditations that relate to business valuations, economic damages and fraud. Richard has been an instructor for
the National Association of Certified Valuation Analysts for many years, has been an instructor for the Internal
Revenue Service and the International Association of Consultants Valuators and Analysts (IACVA). Richard is
currently the Director of Education for the IACVA and is responsible for the business valuations materials being
taught in 55 countries. Richard has taught business valuation or economic damage courses in China, Korea, Taiwan.
Richard has performed over 1,000 business valuations since 1985. Richard has testified in Texas County Court,
Texas State Court, Bankruptcy Court and Texas State Courts. Richard has given testimony in economic damages
(lost profits), shareholder disputes, personal injury, wrongful termination and divorce.
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About The Faculty
David Spitulnik - dspitulnik@spitulnikadvisors.com
David Spitulnik is a successful executive with over 40 years of experience in both large
technology companies and in consulting to and leadership of mid-market, closely held and family
owned businesses across a variety of industries. In addition to serving as chair of the Private
Directors Association’s Private and Family Business Center Outreach Committee, David
frequently writes and speaks on a number of topics related to leading, building, maintaining and
strengthening businesses and their governance structures. Drawing from a broad range of
experience in the United States and internationally, David is called upon to coach and mentor
business leaders, to work with companies to develop and implement their long-range plans and to
advise businesses on board creation, structure and effectiveness so that the individual, the board
and the company can maintain powerful forward momentum.
To read more, go to: https://www.financialpoise.com/webinar-faculty/david-spitulnik/
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Questions or Comments?
If you have any questions about this webinar that you did not get to ask during the live
premiere, or if you are watching this webinar On Demand, please do not hesitate to email us
at info@financialpoise.com with any questions or comments you may have. Please include
the name of the webinar in your email and we will do our best to provide a timely response.
IMPORTANT NOTE: The material in this presentation is for general educational purposes
only. It has been prepared primarily for attorneys and accountants for use in the pursuit of
their continuing legal education and continuing professional education.
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About Financial Poise
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